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The contrast between the US and
European auto markets is stark and captures the significant
divergence of the two economies. June auto sales
in Europe slumped from a year ago to their lowest level since
1996. In June, US auto sales reached its highest pace since late
2007. US sales are up 11% since last June and are 75%
above the low point in early 2009.
The UK continues to be the only major
bright spot in Europe. Sales have risen for 16 consecutive
months. June sales were 13.4% above a year
ago. In contrast, German sales were off 4.7%. Italian
sales were off 5.5%, while French sales were off 8.4%.
Sales by Peugeot-Citroen were off 10.8%. Fiat sales were
off 12.6% and GM saw almost a 10% decline. Renault's low
cost (Romanian) brand Dacia, saw a 175 increase, while Ford
reported an 8.1% increase.
The EU has the capacity to produce a little more than 19 mln
vehicles a year. Sales in 2012 were 13.1 mln and this year
they are projected to fall to 12 mln. In 2008, 16 mln cars
were bought in the EU.
Given the contraction in the euro area and UK, one might want to
dismiss the excess capacity as cyclical in nature. However,
this is to miss three of important points. First, even in
the best of times, Europe grows slowly and the
institutionalization of ordo-liberalism warns of a protracted
period of slow growth ahead. Second, Europe is on the cusp of
significant demographic changes with a number of countries poised
to experience declining as well as aging populations.
Third, there is a shift in the global division of labor and auto
production is moving east. While Italy, Spain and France
have seen sharp declines in their auto output for more than a
decade, output in the Czech Republic and Slovakia has grown
3-fold in the past 10 years and now produce more than France.
Slovakia, incidentally, has the highest auto output per
capita in the world.
Reports suggest Russia has a growing domestic market and is set
to surpass Germany. Romania is poised to surpass Italy in
auto production. Italy's auto factories are operating near
45% of capacity. The older and less efficient capacity is
in the euro area. Some capacity has been shuttered, and
Ford has announced closure of three factories.

However, the closures insufficient for industry analysts to
anticipate profitable production any time soon. Moreover, with
high levels of unemployment and weak economies, Italy, Spain and
France have indicated that they will not tolerate any more
rationalization of the European auto industry--plant closings--at
their expense.

There are couple factors that seem to help explain the stronger
US auto recovery. First, the bankruptcy of General
Motors and Chrysler and the near-death experience of Ford, helped
spur on an industry restructuring. It included the
closure of capacity. All three are now operating profitably
and operating near 90% capacity. They are being cautious
about adding capacity, according to industry reports. The
normal summer shutdown is being foregone this year.
In contrast, Europe has been slower to restructure continent's
auto sector and despite the Economic and Monetary Union (EMU),
many, if not most industries, remain highly fragmented.

Second, the US officials quickly moved to reanimate the
asset-backed security market, which allows lenders to securitize
auto loans. This has been a significant part of
the rise in non-revolving US consumer credit.

Third, the US labor market has gradually
improved. Leaving aside the unemployment rate,
which is really more about the participation rate, the US economy
has generated roughly 4.5 mln jobs over the past two years.
The point is not about the strength in absolute terms, but
relative to Europe. The housing market in the US has
also improved, with Case-Shiller house price index rising at its
strongest pace since mid-2006. These two consideration help
underpin demand for durable goods.